CHAPTER 6
Credits & Special Taxes
Income Tax Fundamentals 2013
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
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Credits and Deductions
A credit is a direct reduction in tax liability
◦ Credits are used to target certain groups for
tax benefit
◦ Provide equal benefit to all taxpayers
A deduction is a reduction of taxable
income
◦ Reduces tax liability in the amount of
(deduction x tax rate)
◦ Provides more benefit to higher income
taxpayers
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Child Tax Credit
Provides tax relief through a credit to
taxpayers with children
◦ Credit for each child under age 17 claimed
as a dependent and meeting definition of
“qualifying child”
Credit is $1,000 per child
◦ Credit begins phasing out when
 AGI > $110,000 (MFJ)
 AGI > $ 75,000 (HH, S)
 AGI > $ 55,000 (MFS)
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Phased out $50 for each
$1,000 (or part thereof) that
AGI exceeds threshold
Earned Income Credit (EIC)
Refundable credit
◦ Serves as “negative” income tax
◦ Can get refund even if have no tax liability
Taxpayer may get EIC, even without kids
◦ Taxpayer must be between ages 25 and 65 and not
claimed as another taxpayer’s dependent
◦ “Disqualified income” (identified as certain type of
investment income) must be less than $3,200
Taxpayer(s) with children can receive EIC
◦ If child meets definition of “qualifying child”
◦ Single or married taxpayers (MFJ only)
◦ Earned income meets certain guidelines
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Child &
Dependent Care Credit
Gives tax relief to working parents who must provide
childcare for dependents
◦ Dependent must be under age 13 or
◦ Spouse or dependent who cannot care for themselves
If child’s parents are divorced, child need not be
dependent of taxpayer claiming credit if he/she lives
more than 50% of year with that parent
Multiply qualifying care costs (see next slide) by an
applicable percentage, based on AGI
◦ From 35% down to 20%
◦ Credit percentages found on Table 6.1 on page 6-5
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American Opportunity Credit
 Provides tax relief for qualified higher education expenses
◦ Tuition, fees, books and course materials
 Available for each eligible student in first four years of college
◦ Eligible students are taxpayer, spouse or dependent
◦ Student must be at least 1/2 time for one term during tax year
◦ Student must not have felony drug conviction
 Credit = 100% of first $2,000 + (25% of the next $2,000)
◦ Maximum credit = $2,500
◦ Phased out when AGI > certain levels (see page 6-9)
◦ 40% of it is refundable
Note: This credit is the expanded and renamed ‘old’ HOPE credit
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Lifetime Learning Credit (LLC)
Provides tax relief for education expenses encourages taxpayers to take courses to acquire or
improve job skills
◦ Tuition and fees only (not books)
◦ Can be used for less than ½ time attendance
◦ Not disqualified for felony drug conviction
Credit = 20% of first $10,000
◦ Maximum credit = $2,000 per year
◦ Lower AGI phase-outs than American Opportunity Credit
◦ May take credit in relation to undergraduate, graduate or
professional courses
◦ No limit on number of years you may claim LLC
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Adoption Credit
 IRS provides a credit as relief to taxpayers who pay
adoption expenses
 Credit is amount spent up to $12,650 per adoption (not
an annual amount)
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Adoption credit begins to phase out when AGI > $189,710
Different rules if pay expenses over more than one year or if
foreign adoption or special needs child
 Qualified adoption expenses include court costs, legal
fees, travel, etc.
 Unused credits can be carried over for up to five years
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Overview of Major Energy Credits
In 2012, two major credits designed to
encourage individuals to utilize energyefficient products
° Plug-in Electric Vehicle Credit
° Credit for Residential Energy-Efficient
Property (REEP)
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Energy-Efficient Vehicles Credit
Credit for purchase of hybrid gas-electric vehicles
° Amounts vary, based on combination of weight and
kilowatt hour of traction battery capacity (between $2,500
- $7,500)
° Credit phases out for each car manufacturer when they
hit 200,000 cars sold
° 10% credit up to $4,000 is allowed for cost of converting
any motor vehicle into a qualified plug-in electric drive
vehicle
° 10% credit up to $2,500 for electric drive low-speed
vehicles, motorcycles and three-wheeled vehicles (except
golf carts)
Note: 10% credit set to expire 12/31/12, but may be extended by Congress
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